tax guide for small businesses 2009/10 businesses tax guide 2010.pdf · y conclusion 91 . 7 1. ......

SOUTH AFRICAN REVENUE SERVICE

TAX GUIDE

FOR

SMALL BUSINESSES

2009/10

Another helpful guide brought to you by the South African Revenue Service

TAX GUIDE FOR SMALL BUSINESSES

2009/10 This document is a general guide dealing with the taxation of small businesses. It is not meant to go into the precise technical and legal detail that is often associated with taxation. It should, therefore, not be used as a legal reference and is not a binding general ruling issued under section 76P of the Income Tax Act, No. 58 of 1962. Should an advance tax ruling be required, visit the SARS website for details of the application procedure. The information in this guide relates to the 2009/10 year of assessment (tax year) that covers in the case of:

Individuals, the period 1 March 2009 to 28 February 2010. Companies and close corporations, tax years ending during the period

of 12 months ending on 31 March 2010. This guide has been updated to include the Taxation Laws Amendment Act, No. 17 of 2009. The Commissioner for the South African Revenue Service is responsible for the administration of tax and customs legislation. Should you require additional information concerning any aspect of taxation, you may: Contact your local SARS office Contact the SARS Call Centre on 0800 00 72 77 Visit the SARS website at www.sars.gov.za Contact your own tax advisor/practitioner

Prepared by Legal and Policy Division SOUTH AFRICAN REVENUE SERVICE December 2009

TAX GUIDE FOR SMALL BUSINESSES

2009/10

CCOONNTTEENNTTSS PAGE 1. OVERVIEW 7

1.1 Glossary 7 2. GENERAL CHARACTERISTICS OF DIFFERENT TYPES OF

BUSINESSES 8

2.1 Introduction 8 Sole proprietorship 8

Partnership 9 Close corporation 9 Private company 10 Co-operatives 11 Other types of business entities as described in the Act 11 Small business corporations 11 Personal service provider 11 Labour broker 12 Independent contractor 13

Small, Medium and Micro enterprises (SMMEs) 14 3. YOUR BUSINESS AND SARS 14

3.1 Introduction 14 3.2 Income Tax 15

General 15 Registration 15 Change of address 15 Filing 15 e-Filing 16 Payments at banks 16 Provisional tax 16 Employees tax (PAYE) 17 Directors remuneration 17 How to determine net profit or loss 18 Comparative profit or loss statements 19 Link between net profit and taxable income 20 How to determine taxable income/assessed loss 21 General deduction formula 22 Tax rates 22 Special allowances/deductions 26

4

Tax relief measures for: 40 Small business corporations (SBCs) 40 Micro businesses (turnover tax) 42 Manufacturing 43 Farming 43 Mining 45

Exemption of certified emission reductions 46 Deduction of home office expenditure 46 Deductions in respect of expenditure and losses

incurred prior to commencement of trade (pre-trade costs) 47 Ring fencing of assessed losses of certain trades 47 Prohibited deductions 47 Withholding tax on royalties 48 Withholding tax on foreign entertainers and sport persons 48 Withholding tax on payments to non-residents sellers on the

sale of their immovable property in RSA 49 Mineral and petroleum resources royalties 50

3.3 Residence basis of taxation (RBT) 50 3.4 Capital gains tax (CGT) 51 3.5 Donations tax 56 3.6 Value-added tax (VAT) 56

Supplies 56 Taxable supplies 58 Exempt supplies 58

Registration 58 Compulsory registration 58 Voluntary registration 58 Turnover tax an alternative to VAT registration 59

Accounting basis 60 Invoice basis 60 Payment basis 60

Tax periods 60 Calculation of VAT 61 Small retailers VAT package (SRVP) 62 Requirements of a valid tax invoice 62 Submission of VAT returns 63 Duties of a vendor 64 Exports 64

3.7 Estate duty 65 3.8 Stamp duty 67 3.9 Securities transfer tax (STT) 67

5

3.10 Transfer duty 68 3.11 Importation of goods and payment of customs and excise duties

and VAT 69 Introduction 69 Registration as an importer 70 Goods imported through appointed places of entry 70 Import declarations 70 Tariff classification 71 Customs value 71 Duties and levies 71

Customs duty 71 Excise duties 71 General fuel levy and Road Accident Fund levy 72 Environmental levy (see also par 3.14) 72 Anti dumping and countervailing duties on imported goods 72

VAT Importation of goods 72 Deferment, suspension and rebate of duties 72

3.12 Exportation of goods 73

Introduction 73 Registration as an exporter 73 Export declarations 73

3.13 Free trade agreements and preferential arrangements with

other countries 74

3.14 Environmental levy 75 3.15 Air passenger departure tax 76 3.16 Skills development levy (SDL) 76 3.17 Unemployment insurance contributions 76 4. YOUR BUSINESS AND OTHER AUTHORITIES 77 4.1 Introduction 77

Municipalities 78 Unemployment Insurance Commissioner 78 South African Reserve Bank Exchange control regulations 78 Department of Trade and Industry 79 Broad-Based Black Economic Empowerment Act,

No. 53 of 2003 79 Environmental 79 Safety and security 79 Labour 80 Promotion of Access to Information Act, No. 2 of 2000 80 Regulation of Interception of Communications and

6

Provision of Communications-related Information Act, No. 70 of 2002 (RICA) 80

Electronic Communications and Transactions Act, No. 25 of 2002 (ECTA) 80

Prevention of Organised Crime Act, No. 121 of 1998 (POCA) 81 Financial Intelligence Centre Act, No. 38 of 2001 (FICA) 81 Financial Advisory and Intermediary Services Act, No. 37

of 2002 (FAIS Act) 81 Prevention and Combating of Corrupt Activities Act, No. 12

of 2004 (PCCA Act) 82 Companies Act, No. 61 of 1973 82 Close Corporations Act, No. 69 of 1984 (CCA) 82 Consumer Affairs (Unfair Business Practices) Act, No. 71

of 1988 82 National Small Enterprise Act, No. 102 of 1996 83 Business Names Act, No. 27 of 1960 83 Lotteries Act, No. 57 of 1997 83 Mineral and Petroleum Resources Development Act, No. 28

of 2002 83 Promotion of Administrative Justice Act, No. 3 of 2000 (PAJA) 83 Protected Disclosures Act, No. 26 of 2000 84 National Credit Act, No. 34 of 2005 84 Consumer Protection Act, No. 68 of 2008 84

5. GENERAL 84

Record-keeping 84 Importance of accurate records 85 Appointment of Auditor/Accounting Officer 87 Representative taxpayer 87 Tax clearance certificates 87 Non-Compliance with legislation 88 Interest, penalties and additional tax 88 Dispute resolution 88 SARS Service Monitoring Office (SSMO) 90 Conclusion 91

7

1. OVERVIEW This guide contains information about the tax laws and some other statutory

obligations that apply to small businesses. It describes some of the forms of business entities in RSA sole proprietorship, partnership, close corporation and a private company and explains in general terms the tax responsibilities of each.

It also contains general information, such as the different type of business entity,

registration, aspects of record keeping, relief measures for small business corporations, how net profit/loss and taxable income/assessed loss are determined. This helps to illustrate the specific tax considerations for the different types of business entities. Furthermore, it contains information on some of the other taxes you may have to pay in addition to income tax.

The information in this guide applies to different kinds of businesses and is of a

general nature. Specific types of businesses are not discussed such as insurance companies, banks and investment companies. However, the requirements of the tax laws regarding, for example, registration and filing of tax forms also apply to them.

1.1 Glossary the Act : Income Tax Act, No. 58 of 1962 CC : close corporation CGT : capital gains tax Commissioner : Commissioner for the South African Revenue Service ITAC : International Trade Administration Commission PAYE : pay-as-you-earn (employees tax)

RBT : residence basis of taxation RSA : Republic of South Africa

SARS : South African Revenue Service SBC : small business corporation SDL : skills development levy SMMEs : small, medium and micro enterprises STC : secondary tax on companies STT : Securities transfer tax tax year : year of assessment TCC : tax clearance certificate UIC : unemployment insurance contribution

the VAT Act : Value-Added Tax Act, No. 89 of 1991 VAT : value-added tax

8

2. GENERAL CHARACTERISTICS OF DIFFERENT TYPES OF BUSINESSES

2.1 Introduction Once you have decided to start a business, you must also decide (which

will be your own choice entirely) what type of business entity to use. There are legal, tax and other considerations that can influence this decision. The legal and other considerations are beyond the scope of this guide while the tax consequences of conducting business through each type of entity will be an important element in making your decision.

The purpose of this guide is not to advise you on the type of business entity

through which to conduct your business, but to provide entrepreneurs with information to assist them to make their own informed decisions when starting a business.

Sole proprietorship

A sole proprietorship is a business that is owned/operated by one person.

This is the simplest form of business entity. The business has no existence (therefore not a legal person such as a company) separate from the owner who is called the proprietor. The owner must include the income from such business in his/her own income tax return and is responsible for the payment of taxes thereon. Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of all of his or her assets whether used in the business or not.

Some advantages of a sole proprietorship are:

Simple to establish and operate. Owner is free to make decisions Minimum of legal requirements. Owner receives all the profits. Easy to discontinue the business.

Some disadvantages of a sole proprietorship are:

Unlimited liability of the owner. The individual owner is legally liable for all the debts of the business. Not only the investment or business property, but any personal and fixed property may be attached by creditors.

Limited ability to raise capital. The business capital is limited to whatever the owner can personally secure. This limits the expansion of a business when new capital is required. A common cause of failure of this form of business organisation is lack of funds. This restricts the ability of a sole proprietor to operate the business effectively and survive at an initial low profit level, or to get through an economic rough spot.

Limited skills.

9

One individual alone has limited skills, although the owner may be able to hire employees with sought after skills.

Partnership A partnership (or unincorporated joint venture) is the relationship existing

between two or more persons who join together to carry on a trade, business or profession. A partnership is also not a separate legal person/taxpayer. Each partner is taxed on his/her share of the partnership profits. Each person may contribute money, property, labour or skills, and each expects to share in the profits and losses of the business. It is similar to a sole proprietorship except that a group of owners replaces the individual owner. The number of persons who may form a partnership agreement is limited to twenty. As is the case for a sole proprietorship the partnership has advantages and disadvantages.

Some advantages of a partnership are:

Easy to establish and operate. Greater financial strength. Combines the different skills of the partners. Each partner has a personal interest in the business.

Some disadvantages of a partnership are:

Unlimited liability of the partners.

Each partner may be held liable for all the debts of the business. Therefore, one partner who is not exercising sound judgment could cause the loss of the assets of the partnership as well as the personal assets of all the partners.

Authority for decision-making is shared and differences of opinion could slow the process down.

Not a legal entity.

Lesser degree of business continuity as the partnership technically dissolves every time a partner joins or leaves the partnership.

Number of partners restricted to 20, except in the case of certain professional partnerships such as accountants, attorneys, etc.

Close corporation (CC)

The CC is similar to a private company. It is a legal entity with its own legal personality and perpetual succession and must register as a taxpayer in its own right. The CC has no share capital and therefore no shareholders. The owners of the CC are the members. Members do not hold shares in the CC and, therefore, have a membership interest in the CC. This interest is expressed as a percentage. Membership, generally speaking, is restricted to natural persons or (from 11 January 2006) a trustee of an inter vivos trust or testamentary trust as contemplated in section 29(1A) or 29(2)(b) of the Close Corporation Act, No. 69 of 1984.

10

The CC may not have an interest in another CC. The minimum number of members is one and the maximum number of members is ten. For income tax purposes, a CC is dealt with as if it is a company.

Some advantages of a CC are:

Relatively easy to establish and operate.

Life of the business is perpetual, that is, continues uninterrupted as members change.

Members have limited liability, that is, they are generally not liable for the debt of the CC. However, it should be noted that certain tax liabilities do exist. One such liability is where an employer/vendor is a CC, every member and person who performs functions similar to a director of a company, who controls or is regularly involved in the management of the CCs overall financial affairs will be personally liable for employees tax, value-added tax, additional tax, penalty or interest for which the CC is liable, that is, where these taxes have not been paid to SARS within the prescribed period.

Transfer of ownership is easy.

Fewer legal requirements than a private company.

Some disadvantages of a CC are: Number of members restricted to a maximum of ten. More legal requirements than a sole proprietorship or partnership.

Private Company

A company is treated by law as a separate legal entity and must also

register as a taxpayer in its own right. It has a life separate from its owners with rights and duties of its own. The owners of a private company are the shareholders. The managers of a private company may or may not be shareholders. A company may not have an interest in a close corporation. The maximum number of shareholders is restricted to fifty.

Some advantages of a private company are:

Life of the business is perpetual, that is, it continues uninterrupted as shareholders change.

Shareholders have limited liability, that is, they are generally not responsible for the liabilities of the company. However, it should be noted that certain tax liabilities do exist. One such liability is where an employer/vendor is a company, every shareholder and director who controls or is regularly involved in the management of the companys overall financial affairs shall be personally liable for the employees tax, value-added tax, additional tax, penalty or interest for which the company is liable, that is, where the taxes have not been paid to SARS within the prescribed period.

11

The Companies Act, No. 61 of 1973 (this Act will be replaced by the Companies Act, No. 71 of 2008, which is scheduled to become into operation next year ) imposes personal liability on directors where in common law such liability may not exist, or be difficult to prove. Any person, not only a director, who is knowingly a party to the carrying on of a business in a reckless (gross carelessness or gross negligence) or fraudulent manner can be personally liable for all or any of the debts of the company.

Transfer of ownership is easy.

Easier to raise capital and to expand.

Efficiency of management is maintained.

Adaptable to both small and medium to large business.

Some disadvantages of a private company are: Subject to many legal requirements. More difficult and expensive to establish and operate than other forms

of ownership such as a sole proprietorship or partnership. Co-operatives

A co-operative is defined in the Act as any association of persons registered in terms of section 27 of the Co-operatives Act, 1981 or section 7 of the Co-operatives Act, No. 14 of 2005. The tax dispensation of co-operatives is discussed in this guide under Tax relief measures for: Small business corporations.

Other types of business entities as described in the Act

Small business corporations

Small business corporations are discussed under Tax relief measures for: Small business corporations.

Personal service provider

A personal service provider means any company or trust where any service rendered on behalf of such company or trust to a client of such company or trust is rendered personally by any person who is a connected person in relation to such company or trust, and

such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company or trust; or

where those duties must be performed mainly at the premises of the client, such person or such company or trust is subject to the control or supervision of such client as to the manner in which

12

the duties are performed or are to be performed in rendering such service; or

where more than 80% of the income of such company or trust during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of such company or trust, or any associated institution as defined in the Seventh Schedule to the Act, in relation to such client

A company that falls within the above definition of a personal service provider will, therefore, not qualify as an SBC. Should that company, however, employ three or more full-time employees (excluding shareholders/members or any persons connected to the shareholders/members) throughout the year of assessment and the employees are engaged in the business of the company in rendering the specific service, that company may qualify as an SBC.

Payments made to a personal service provider are subject to the deduction of employees tax.

For further information refer to the GUIDE FOR EMPLOYERS IN RESPECT OF EMPLOYEES TAX (2010 TAX YEAR) which is available on the SARS website under All Publications/PAYE or contact a SARS office.

Labour broker

A labour broker is any natural person who carries on the business, for reward, of providing clients with persons to render a service to such clients for which such persons are remunerated.

Employers are required to deduct employees tax from all payments made to a labour broker, unless the labour broker is in possession of a valid exemption certificate issued by SARS.

An exemption certificate will be issued by SARS if o the person carries on an independent trade and is registered as

a provisional taxpayer; o the labour broker is registered as an employer; and o all returns required by SARS, have been submitted.

SARS will not issue an exemption certificate if o more than 80% of the gross income of the labour broker during

the year of assessment consists of amounts received from any one client of the labour broker, unless the labour broker employs three or more full-time employees throughout the year of assessment who are on a full-time basis engaged in the

13

business of the labour broker and who are not connected persons in relation to the labour broker; or

o the labour broker provides to any of its clients the services of another labour broker; or

o the labour broker is contractually obliged to provide a specified employee of the labour broker to the client.

Payments made to persons who render services to or on behalf of a labour broker without an exemption certificate are subject to the deduction of employees tax.

For further information, refer to the GUIDE FOR EMPLOYERS IN RESPECT OF EMPLOYEES TAX (2010 TAX YEAR) and Interpretation Note No. 35 (Draft) (Issue 3): EMPLOYEES TAX: PERSONAL SERVICE PROVIDERS AND LABOUR BROKERS which are available on the SARS website. Notes:

(1) The deduction of expenses incurred by a labour broker without

an exemption certificate or a personal service provider is limited to the amounts paid to the employees of such labour broker or personal service provider ,for services rendered that will comprise taxable income in the hands of those employees.

(2) In the case of a personal service provider the following expenses

will also be allowed as deductions certain legal costs, bad debts, contributions to

pension/provident funds/medical schemes, refunds of remuneration or compensation for restraint of trade included in taxable income ;

operating expenses in respect of premises; and finance charges/insurance/repairs/fuel/maintenance in

respect of assets, if such premises/assets are used wholly and exclusively for purposes of trade.

Independent contractor

The concept of an independent trader or independent contractor remains one of the more contentious features of the Fourth Schedule to the Act. An amount paid or payable for services rendered or to be rendered by a person in the course of a trade carried on by him/her independently of the person by whom the amount is paid or payable is excluded from remuneration for employees tax purposes.

14

Notes: (1) A person will be deemed not to be carrying on a trade

independently if the services are required to be performed mainly at premises of the person by whom the above amount is paid or payable or of the person to whom such services were or are to be rendered and the person who rendered or will render the services is subject to control or supervision as to the manner in which his or her duties are performed or as to his/her hours of work.

(2) A person will be deemed to be carrying on a trade independently

if he/she employs three or more full-time employees throughout the year of assessment who are on a full-time basis engaged in the business of the person rendering that service (other than any employee who is a connected person).

An amount paid to a person who is deemed not to carry on a trade independently will constitute remuneration and will be subject to the deduction of employees tax.

For further information on independent contractors refer to Interpretation Note No. 17: EMPLOYEES; TAX: INDEPENDENT CONTRACTORS which is available on the SARS website.

Small, Medium and Micro enterprises (SMMEs)

Information on SMMEs, details of various assistance schemes, rebates, incentives and information such as how to start a business, type of business entities and requirements of registration of a business entity may be obtained from the Department of Trade and Industry or on their website www.dti.gov.za.

3. YOUR BUSINESS AND SARS 3.1 Introduction Now that you are starting a business, it will be helpful if you have a general

understanding of the various activities of SARS, as well as your duties and obligations in terms of the tax laws.

The tax laws are administered by the Commissioner, acting through SARS

offices situated in various centres throughout the country. SARS is obligated by law to determine and collect from each taxpayer only

the correct amount of tax that is due to the Government. The SARS offices are the representatives of the Commissioner and in that capacity must ensure that the tax laws are administered correctly and fairly so that no one is favoured or prejudiced above the rest.

15

3.2 Income tax

General

Income tax is the States main source of revenue and is levied on taxable income determined in terms of the Act.

Registration

As soon as you commence your business (whether as a sole proprietor,

partnership or any other form), you are required to register with your local SARS office in order to obtain an income tax reference number. You must register within 60 days after you have commenced business by completing an IT 77 form, which can be obtained from your local SARS office or from the SARS website.

If you start your business via a CC or private company you must register

the CC or private company with the Registrar of Companies and Close Corporations to obtain a business reference number. Your CC or private company will then be registered automatically as a taxpayer. If you do not hear from SARS after registering with the Registrar contact your SARS office.

Depending on other factors such as turnover, payroll amounts, whether

you are involved in imports and exports, etc. you could also be liable to register for other taxes and duties such as VAT, PAYE, Customs, Excise, SDL and UIC.

Change of address

The Act requires that if a persons address which is normally used by the Commissioner for any correspondence with that person changes, the person must, within 60 days after the change, notify SARS of the new address for correspondence.

Filing

The tax year for individuals covers a period of 12 months and commences on 1 March of a specific year and ends on the last day of February of the following year. However, in some circumstances you may be allowed to draw up your financial statements for your business to dates other than the end of February. For more details see Interpretation Note No. 19: YEAR OF ASSESSMENT: ACCOUNTS ACCEPTED TO DATE OTHER THAN THE LAST DAY OF FEBRUARY, which is available on the SARS website.

A company/close corporation on the other hand is permitted to have a tax

year ending on a date that coincides with its financial year-end. If the financial year-end is 30 June, its tax year or year of assessment will run from 1 July to 30 June.

16

Income tax returns must be submitted manually or electronically by a specific date each year.

e-Filing

The primary objective of SARS e-Filing is to facilitate the electronic submission of tax returns and payments by taxpayers and tax practitioners. Taxpayers registered for e-Filing can engage with SARS online for submission of returns and payments in respect of the following taxes: Value-added tax (VAT). Pay-as-you-earn (PAYE). Income tax. Provisional tax. Skills development levy (SDL). Unemployment insurance fund (UIF). Transfer duty and stamp duty Secondary tax on companies (STC). For more information visit the SARS e-Filing website at www.sarsefiling.gov.za.

The following should, however, be noted: Taxpayers must retain all supporting documents for a period of five

years from the date upon which the return was received by SARS, should SARS required it for audit purposes.

SARS will under certain circumstances, on request, still require the submission of original documents for purposes of verification.

SARS will do extensive validation checks on the data submitted to ensure its accuracy, including validations against the electronic employees tax certificates (IRP5s) submitted by employers to SARS.

SARS will issue these assessments electronically.

Payments at banks

Payment of taxes can be made via the First National Bank, ABSA, Nedbank and Standard Bank internet facilities. Over the counter payment of taxes can also be done at these banks. For more information also visit the e-Filing website.

Provisional tax

As soon as you commence business, you will also be required to register

with your local SARS office as a provisional taxpayer. Close corporations and companies are automatically registered as provisional taxpayers. The payment of provisional tax is intended to assist taxpayers in meeting their normal tax liabilities. This occurs by the payment of two instalments in respect of income received or accrued during the relevant tax year and an optional third payment after the end of the tax year, thus obviating, as far as possible, the need to make provision for a single substantial normal tax payment on assessment after the end of the tax year. The first provisional tax payment must be made six months after the commencement of the tax year and the second payment not later than

17

the last day of the tax year. The optional third payment is voluntary and may be made within six months after the end of the tax year if your accounts close on a date other than the last day of February. If your tax year ends on the last day of February, the optional third payment must be made within seven months after the end of the tax year. Further information regarding the payment of provisional tax, can be found in the REFERENCE GUIDE - PROVISIONAL TAX which is available on the SARS website, under All Publications/Provisional Tax.

Employees tax

Employees tax is a system in terms of which an employer, as an agent of

government, deducts employees tax (PAYE) from the earnings of employees and pays it over to SARS on a monthly basis. This tax serves as a tax credit that is set-off against the final income tax liability of an employee, which is determined on an annual basis. A business (employer) that pays salaries, wages and other remuneration to any of its employees that is above the tax thresholds (where liability for income tax arises, namely R54 200 for individuals under the age of 65 years and R84 200 for individuals aged 65 years or older), must register with SARS for employees tax purposes. This is done by completing an EMP 101 form and submitting it to SARS. The EMP 101 is available at all SARS offices and on the SARS website. Once registered, the employer will receive a monthly return (EMP 201) that must be completed and submitted together with the deducted employees tax within seven days of the month following the month for which the tax was deducted.

Information regarding the deduction of PAYE can be found in the GUIDE FOR EMPLOYERS IN RESPECT OF EMPLOYEES TAX (2010 TAX YEAR) which is available on the SARS website under All Publications/PAYE.

Directors remuneration

The remuneration of directors of private companies (including individuals in close corporations performing similar functions) is subject to employees tax. The remuneration of private company directors is often only finally determined late in the year of assessment or in the following year. The directors in these circumstances finance their living expenditure out of their loan accounts until the remuneration is determined. To overcome the problem of no monthly remuneration being payable from which employees tax can be withheld, a formula is used to determine a deemed monthly remuneration upon which the company must deduct employees tax. For more information on the application of the formula and relief from hardship refer to Interpretation Note No. 5: EMPLOYEES TAX: DIRECTORS OF PRIVATE COMPANIES (WHICH INCLUDE PERSONS IN CLOSE CORPORARIONS WHO PERFORM FUNCTIONS SIMILAR TO DIRECTORS OF COMPANIES) which is available on SARS website.

18

A director is not entitled to receive an employees tax certificate (IRP 5) in respect of the amount of employees tax paid by the company on the deemed remuneration if the company has not recovered the employees tax from the director.

How to determine net profit or loss

In order to prepare your income tax return, you will need to understand

the basic steps for determining your businesss profit or loss. This procedure is fairly simple and is much the same for each type of business entity. Basically, net profit or loss is determined as follows:

Income Expenses = Profit (Loss)

You will use this formula with some slight changes in determining your profit or loss. The diagram Comparative profit or loss statements below explains the determination of net profit or loss and the distribution of income for the different types of business entities.

Gross sales

Gross sales are the income which is received by or accrued to a business. For example, ABC Furniture Store sold R1 000 000 worth of furniture of which R800 000 was received in cash. Therefore, ABC Furniture Store had gross sales of R1 000 000.

Cost of sales

Cost of goods sold or cost of sales is the cost to the business to buy or make the product that is sold to the consumer. It would be simple to determine the cost of sales if you sold all your merchandise during the year. However, this seldom happens. Some of your sales during the year will probably be from stock that was bought in the previous year and some of the goods that were bought in the current year. To determine the cost of sales under these circumstances, you add the cost of goods bought during the current year to the cost of your stock on hand at the beginning of the year. From this total you subtract the cost of your stock on hand at the end of the year.

For example, ABC Furniture Store had R120 000 worth of furniture in the store at the beginning of the year. During the current year R730 000 worth of furniture was bought from a manufacturer. At the end of the current year the store had R150 000 worth of furniture left. The cost of goods sold for the current year would therefore be:

Opening stock + Purchases Closing stock = Cost of sales R120 000 + R730 000 R150 000 = R700 000

Gross profit

Gross profit equals gross sales less the cost of goods sold. ABC Furniture Store had gross sales of R1 000 000. The cost of sales was R700 000. The gross profit is therefore R300 000, that is, R1 000 000 R700 000.

19

Business expenses Business expenses, also referred to as operating expenses, are the

ordinary and necessary expenses incurred in the operation of the business. ABC Furniture Store incurred R200 000 expenses, for example, wages, telephone, electricity, stationery, etc.

Net profit or loss

Net profit is the amount by which the gross profit for a period exceeds the business expenses for the same period. Net loss is the amount by which the business expenses exceed the gross profit. ABC Furniture Store had a gross profit of R300 000, the business expenses were R200 000 leaving ABC Furniture Store with a net profit of R100 000.

In the case of a business that provides a service, that is, no physical

goods are kept or sold, the procedure to determine your business profit or loss is the same as mentioned above with the exception of cost of goods sold. A business that provides only a service will not have to calculate cost of goods sold. Business or operating expenses will be deducted from gross sales, that is, professional fees, taxi fares and services rendered to determine a net profit or net loss.

Comparative profit or loss statements

SOLE PROPRIETORSHIP PARTNERSHIP gross sales gross sales less cost of sales less cost of sales equals gross profit equals gross profit less business expenses less business expenses equals net profit or loss1 equals net profit or loss2 The owner receives the entire Net profit or loss is profit or loss from the business divided amongst the and is responsible for the partners. payment of all taxes thereon in his personal capacity.

Each partner is responsible

for the payment of taxes on his/her share of the profit.

1 See also How to determine taxable income/assessed loss

20

CLOSE CORPORATION PRIVATE COMPANY gross sales gross sales less cost of sales less cost of sales equals gross profit equals gross profit less business expenses less business expenses equals net profit or loss2 equals net profit or loss2 less tax less tax equals profit after tax equals profit after tax retained distributed retained distributed dividends to dividends to members shareholders The close corporation The company is is responsible for the responsible for the payment of taxes. payment of taxes. Taxes include normal Taxes include normal (income) tax on taxable income (income) tax on taxable income and secondary tax on and secondary tax on companies (STC) on companies (STC) on net dividends declared. net dividends declared. Dividends received by Dividends received by members are exempt. shareholders are exempt from income tax. from income tax. Note: Certain foreign dividends are, however, taxable.

Link between net profit and taxable income

Net profit is an accounting concept and is a term used to describe the amount of the profit made by a business from an accounting point of view.

21

Taxable income on the other hand is a tax term that is used to describe the amount on which a businesss income tax is calculated.

The amounts will often be different. The reason therefore is the basic

differences in the income and deductions taken into account in determining those two amounts. For example, certain income of a capital nature may be fully included for accounting purposes, while only a portion thereof may be included for tax purposes, see 3.4. On the deduction side, there may be timing differences in respect of the depreciation of capital assets or special deductions/allowances for tax purposes which will cause differences in the deductions between accounting and taxation.

Nevertheless, the determination of net profit from an accounting point of

view is an important building block in the determination of the businesss taxable income. Every business must first prepare a set of financial statements (income statement and a statement of assets and liabilities). From the income statement which determines the businesss net profit/ loss, certain adjustments can be made to compute (normally referred to as the tax computation) the businesss taxable income or assessed loss as explained below.

How to determine taxable income/assessed loss

The Act provides for a series of steps to be followed in arriving at the

taxpayers taxable income. The starting point is to determine the taxpayers gross income. In the case of

any person who is a resident: The total amount of worldwide income, in cash or otherwise, received by or accrued to or in favour of such person during the tax year (subject to certain exclusions); or

any person who is not a resident: The total amount of income, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the RSA during the tax year.

Receipts or accruals of a capital nature are generally excluded from

gross income as the Eighth Schedule to the Act deals with capital gains and losses. However, gross income also includes certain other receipts and accruals specified within the definition of gross income regardless of their nature.

The next step is to determine income which is the result of deducting all

receipts and accruals that are exempt from income tax in terms of the Act from gross income.

Finally, taxable income or assessed loss is arrived at by

deducting all the amounts allowed to be deducted or set off, in terms of the Act, from income; and

adding taxable capital gains to the net positive figure or deducting taxable capital gains from the net negative figure.

22

It can be illustrated as follows:

Gross income (receipts & accruals) LESS: Exemptions EQUALS: Income LESS: Deductions ADD: Taxable capital gain to the positive figure or DEDUCT: Taxable capital gain from the negative figure EQUALS: Taxable income/Assessed loss

General deduction formula The general deduction formula provides for the general rules with which

an expense must comply in order to be deductible for income tax purposes. Other provisions of the Act allow for special deductions/ allowances. If no special deduction/allowance applies, however, the expense in question will have to comply with the general deduction formula.

The general deduction formula provides that for expenditure and losses to be deductible they must be actually incurred; during the year of assessment; in the production of income; not of a capital nature; and laid out or expended for the purposes of trade.

Tax rates

A sole proprietor or each partner is subject to income tax on his/her taxable income. Income tax (normal tax) is levied at progressive rates ranging from 18% to 40%. For the 2010 tax year, the maximum marginal

23

rate of 40% applies where the taxable income exceeds R525 000. Unlike individuals, a company or CC pays income tax at a flat rate of 28% (except in the case of SBC see below) on its taxable income for the tax year and 10% secondary tax on companies (STC) on the net amount of dividends declared.

Below is a summary of the different tax rates

Individuals, deceased or insolvent estates or special trusts Tax rates and rebates for the tax year commencing on 01 March 2009 Tax rates Taxable income Rates of normal tax Not exceeding R132 000 18% of taxable income Exceeding R132 000 but not exceeding R210 000

R23 760 plus 25% of the taxable income exceeding R132 000

Exceeding R210 000 but not exceeding R290 000






Exceeding R525 000 R152 960 plus 40% of the taxable income exceeding R525 000

Rebates Age Amount Under 65 years R9 756 65 years or older R15 156

Trusts (and personal service providers that are trusts)

Tax rates trusts (other than a special trust) Tax year ending on Rate of normal tax 28 February 2010 40% of taxable income

Corporates

o Companies (Standard)/Close Corporations

Tax year ending during the period of 12 months ending on

Rate of normal tax

31/03/2010 28% of taxable income

24

o Secondary tax on companies (STC)

STC is payable on dividends declared by resident companies after being reduced by dividends receivable during a dividend cycle. Companies which are not residents are not subject to STC. For more information see the Comprehensive Guide to Secondary Tax on Companies (Issue 2) which is available on the SARS website.

From Until Rate of STC 14/03/1996 30/9/2007 12,5% 01/10/2007 To date 10%

o Small business corporations (SBCs): Tax year ending during

the period of 12 months ending on 31/03/2010

Taxable income Rates of normal tax Not exceeding R54 200 0% of taxable income Exceeding R54 200 but not exceeding R300 000

10% of the taxable income exceeding R54 200

Exceeding R300 000 R24 580 plus 28% of the taxable income exceeding R300 000

o Mining companies

Companies mining for gold (taxed according to one of the following formulae gold mining tax formula) Tax year ending between

Not exempt from STC

Elected to be exempt from STC

1/04/2009 to 31/03/2010

y = 34 (170/x) (other income taxed at 28%)

y = 43 (215/x) (other income taxed at 35%)

Where x = the ratio expressed as a percentage as follows:

Taxable income from gold mining Total revenue (turnover) from gold mining y = rate of tax to be levied

o Oil and Gas Companies

Rate of normal tax

The rate of tax on taxable income derived from oil and gas income by an oil and gas company that

25

is a resident company may not exceed 28% (or an oil and gas company which is not a resident and which solely derives its oil and gas income by virtue of an OP26 right previously held by such company); and

is not a resident and carries on a trade within the RSA may not

exceed 31%.

Rate of STC

The STC rate of an oil and gas company may not exceed 5% on the net amount of dividends declared out of the profits of its oil and gas income. A rate of 0% applies to the net dividend declared by such a company derived from the profits of its oil and gas income solely derived (directly/indirectly) by virtue of an OP26 right previously held. The above rates (5% and 0%) are not applicable where the company is engaged in refining.

For more information see paragraphs 2 and 3 of the Tenth Schedule to the Act.

o Other mining companies

The rates applicable to ordinary companies also apply to all mining companies, other than companies mining for gold.

o Insurance companies

o Long-term insurance companies Four fund basis

Four funds Rate of normal tax for tax

year ending during the period of 12 month ending on 31/03/2010

Corporate fund 28% of taxable income Individual policyholder fund 30% of taxable income Company policyholder fund 28% of taxable income Untaxed policyholder fund: Retirement fund business

(abolished from 1/03/07)

Other 0% of taxable income

o Short-term insurance companies

Companies carrying on a short-term insurance business are taxed at the same rate as is applicable to standard companies

26

o Personal service providers that are companies

Tax year commencing on or after

Rate of normal tax


o Companies which are not residents

A company which is not a resident as defined in section 1 of the Act

Tax year ending during the period of 12 months ending on

Rate of normal tax


Special allowances/deductions

(a) Industrial buildings (buildings used in process of manufacture)

Wear and tear is normally not allowed on buildings or other

structures of a permanent nature. However, an annual allowance equal to 5% (20-year straight-line basis) of the cost of industrial buildings or of improvements to existing industrial buildings is granted.

For more information refer to section 13 of the Act.

(b) Commercial buildings

5% of the cost to the taxpayer of new and unused buildings or improvements to buildings (20-year straight-line basis) which were contracted for on or after 1 April 2007 and the construction, erection or installation of which commenced on or after the above-mentioned date.

For the purposes of the above 5% allowance, to the extent a

taxpayer acquires (1) a building without erecting or constructing that building, the

acquisition price of the building is deemed to be the cost incurred by the taxpayer for the building; and

(2) a part of a building without erecting or constructing that part, the percentages below will be deemed to be the cost incurred

(a) 55% of the acquisition price, in the case of a part being acquired; and

(b) 30% of the acquisition price, in the case of an improvement being acquired.

For more information refer to section 13quin of the Act.

27

(c) Hotel keepers

Buildings and improvements: 5% of the cost to the taxpayer (20-

year straight-line basis).

Machinery, improvements, utensils or articles or improvements thereto: 20% of the cost to the taxpayer (5-year straight-line basis). The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act.

Refurbishment of buildings within existing exterior framework:

20% of the cost to the taxpayer (5-year straight-line basis).

For more information refer to section 13bis of the Act.

(d) Aircraft/ships

Where these assets are brought into use for the purpose of trade: 20% of the cost to the taxpayer (5-year straight-line basis).

The assets must be owned by the taxpayer or acquired as

purchaser in terms of an instalment credit agreement as defined in the VAT Act.

For more information refer to section 12C of the Act.

(e) Rolling stock (that is, trains and carriages)

20% of the cost incurred by the taxpayer (5-year straight-line

basis) in respect of rolling stock brought into use on or after 1 January 2008.


purchaser in terms of an instalment credit agreement as defined in the VAT Act and must be used directly by the taxpayer wholly/mainly for the transportation of persons, goods or things.

For more information refer to section 12DA of the Act.

(f) Pipelines, transmission lines and railway lines

28

Transportation of natural oil

o 10% of the cost incurred by the taxpayer in respect of the acquisition of the asset (10-year straight-line basis).

o The assets must be owned and be brought into use for the

first time by the taxpayer and used directly by the taxpayer for the transportation of natural oil.

Transportation of water used by power stations

o 5% of the cost incurred by the taxpayer in respect of the

acquisition of the asset (20-year straight-line basis).

o The asset must be owned and be brought into use for the first time by the taxpayer and used directly by the taxpayer for the transportation of water used by power stations in generating electricity.

Transmission of electricity



o The assets must be owned and be brought into use for the first time by the taxpayer and used directly by the taxpayer for the transmission of electricity.

Transmission of electronic communications



o The assets must be owned and be brought into use for the first time by the taxpayer and used directly by the taxpayer for the transmission of telecommunication signals.

Railway lines used for transportation of persons, goods or things



o The assets must be owned and be brought into use for the first time by the taxpayer and used directly by the taxpayer for transportation persons/goods/things.

Note: Earthworks or supporting structures forming part of such pipeline, transmission line or cable or railway line and improvements also qualify for the above allowances.

29

For more information refer to section 12D of the Act.

(g) Airport assets [Aircraft, hangars, aprons, runways or taxiways on any designated airport and improvements to these assets (including earthworks or supporting structures forming part of such assets)]

5% of the cost incurred by the taxpayer in respect of the

acquisition (including the construction, erection or installation) of new and unused airport assets (20-year straight-line basis).

For more information refer to section 12F of the Act.

(h) Port assets [Port terminal, breakwater, sand trap, berth, quay wall, wharf, seawall, etc. (including earthworks or supporting structures forming part of such assets) and improvements thereto]

5% of the cost incurred by the taxpayer in respect of the

acquisition (including the construction, erection or installation) of new and unused assets (20-year straight-line basis).

For more information refer to section 12F of the Act.

(i) Machinery, plant implements, utensils and articles

An allowance, equal to the amount which the Commissioner may think just and reasonable which the value of the asset used by the taxpayer for the purposes of his trade has been diminished by reason of wear and tear or depreciation.



Small items costing less than R7 000 purchased on or after 1 March 2009 may be written off in full in the year of acquisition.

For more information, see Interpretation Note No. 47 (Issue 2): WEAR-AND-TEAR OR DEPRECIATION ALLOWANCE which is available on the SARS website.

(j) Machinery or plant (manufacturing or similar process) or

improvements thereto

An allowance equal to 20% (5-year straight-line basis) of the cost to the taxpayer to acquire such machinery or plant.

This allowance is increased in respect of new or unused

machinery or plant acquired on or after 1 March 2002 and brought into use by the taxpayer in its manufacture or similar

30

process carried on in the course of its business on or after that date to o 40% of the costs to the taxpayer of the machinery or plant in

year of assessment during which the machinery or plant was brought into use; and

o 20% of the costs to the taxpayer of the machinery or plant in each of the three succeeding tax years.

The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act.


(k) Small business corporations (SBCs)

Plant or machinery (manufacturing or similar process)

o 100% of the cost of any plant or machinery brought into use in the tax year for the first time and used in a process of manufacture or similar process is deductible.

o The assets must be owned by the taxpayer or acquired as


Machinery, plant, implement, utensil, article, aircraft or ship

o An accelerated allowance for the above assets (other than

plant or machinery used in a manufacturing or similar process) acquired by the SBC on or after 1 April 2005 at

o 50% of the cost of the asset in the tax year during which it was first brought into use;

o 30% in the second tax year; and o 20% in the third tax year.

An SBC can elect to either claim the above 50:30:20 deductions or the wear-and-tear allowance under section 11(e) of the Act.

For more information see under the heading Tax relief measures for: Small business corporations (SBCs), and Interpretation Note No. 9 (Issue 5): SMALL BUSINESS CORPORATIONS which is available on the SARS website.

31

(l) Patents, inventions, copyrights, designs, other property, etc.

An allowance is allowed as a deduction in respect of expenditure incurred to acquire (otherwise than by way of devising, developing or creating) the following property (i) invention or patent as defined in the Patents Act, 1978 (Act

No. 57 of 1978); (ii) design as defined in the Designs Act, 1993 (Act No. 195 of

1993); (iii) copyright as defined in the Copyright Act, 1978 (Act No. 98

of 1978); (iv) other property which is of a similar nature (other than Trade

Marks as defined in the Trade Marks Act, 1993 (Act No. 194 of1993); or

(v) knowledge connected with the use of such patent, design, copyright or other property or the right to have such knowledge imparted,

which is used in the production of income.

The allowance is allowed in the tax year in which the abovementioned property is brought into use for the first time by the taxpayer for the purposes of the taxpayers trade.

Where the expenditure exceeds R5 000, the allowance will not

exceed in any tax year o 5% of the expenditure in respect of any invention, patent,

copyright or the property of a similar nature or any knowledge connected with the use of such invention, patent, copyright or other property or the right to have such knowledge imparted; or

o 10% of the expenditure of any design or other property of a similar nature or any knowledge connected with the use of such design or other property or the right to have such knowledge imparted.

For more information refer to section 11(gC) of the Act.

(m) Research and development

The deduction of research and development (R&D) will be

allowed at a rate of 150% of expenditure incurred in respect of activities undertaken in SA directly for purposes of

the discovery of novel, practical and non-obvious information; or

32

the devising, developing or creation of any invention, design, computer program or knowledge essential to the use of that invention, design or computer program,

which is of a scientific or technological nature intended to be used in the production of income.

The deduction in respect of any new and unused building, part thereof, machinery, plant, implement, utensils or article or improvements thereto brought into use by the taxpayer for R&D purposes will be allowed at the rate of: o 50% of the cost of the asset in the tax year the asset is

brought into use; o 30% in the first succeeding tax year; and o 20% in the second succeeding tax year.

The building deduction will be reduced where the building is also

used for purposes other than R&D For more information see Interpretation Note No. 50: DEDUCTION FOR SCIENTIFIC OR TECHNOLOGICAL RESEARCH AND DEVELOPMENT which is available on the SARS website.

(n) Urban development zones

Taxpayers investing in one of the 15 demarcated urban development areas receive special depreciation allowances for construction or refurbishment of commercial and residential buildings located in these areas that are used solely for trade purposes. These areas are located within the boundaries of the municipalities of Buffalo City, Cape Town, Ekurhuleni, Emalahleni, Emfuleni, eThekwini, Johannesburg, Mangaung, Mbombela, Msunduzi, Nelson Mandela, Polokwane, Sol Plaatje, Tshwane or Matjhabeng.

The allowance is -

in respect of the erection of any new building or the extension of or addition to any building, an amount equal to o 20% of the cost thereof to the taxpayer in the tax year that

building is brought into use by the taxpayer solely for the purpose of that taxpayers trade; and

o 8% of that cost in each of the ten succeeding tax years; and

in respect of improvements to any existing building or part thereof (including any extension or addition which is incidental to that improvements) where the existing structural or exterior framework thereof is preserved, an amount equal to o 20% of the cost thereof to the taxpayer in the tax year in

which that part thereof so improved, extended or added to is

33

brought into use by the taxpayer solely for the purpose of that taxpayers trade; and

o 20% of that cost in each of the four succeeding tax years.

In the case of the erection of any new building or the extension of or addition to a building (other than improvements referred to below), to the extent that it relates to a low-cost residential unit (i) 25% of the cost to the taxpayer in the tax year during which

the building is brought in use by the taxpayer; (ii) 13% of the cost in each of the five succeeding tax years; and (iii) 10% of the cost in the tax year following the last tax year

contemplated in (ii) above.

In the case of the improvement of any existing building or part of a building, to the extent that it relates to a low-cost residential unit, (including any extension or addition which is incidental to that improvement) where the existing structural or exterior framework thereof is preserved (i) 25% of the cost to the taxpayer in the tax year during which

that building is brought into use by the taxpayer; and (ii) 25% of the cost in each of the three succeeding tax years.

For the purposes of the above allowance, where the taxpayer purchased part of a building from a developer, the percentages below will be deemed to be the costs incurred

55% of the purchase price of that part of a building, in the case of a new building erected, extended or added to by that developer; and

30% of the purchase price of that part of a building, in the case of a building improved by the developer

For more information see the GUIDE TO THE URBAN DEVELOPMENT ZONE TAX INCENTIVE September 2009 which is available on the SARS website.

(o) Agricultural co-operatives

Plant or machinery (including improvements) used for storing /

packing farming products: 20% of the cost to the taxpayer in the tax year the asset is brought into use and in the four succeeding tax years (5-year straight-line basis).



34


(p) Additional deduction in respect of learnership agreements

The deduction is as follows:

(1) Where

during any tax year a learner is a party to a registered learnership agreement with an employer; and

that agreement was entered into pursuant to a trade carried on by that employer,

R30 000, in that tax year, will be allowed to be deducted from the income derived by that employer from that trade.

(2) Where

during any tax year a learner is a party to a registered learnership agreement with an employer for a period less than 24 months ;

that agreement was entered into pursuant to a trade carried on by that employer; and

that learner successfully completes that learnership during that tax year,

R30 000 in that tax year will be allowed to be deducted from the income derived by that employer from that trade.

(3) Where

during any tax year a learner is a party to a registered learnership agreement with an employer for a period that equals or exceeds 24 months;

that agreement was entered into pursuant to a trade carried on by that employer; and

that learner successfully completes that learnership during that tax year,

R30 000 multiplied by the number of consecutive 12 month periods within the duration of that agreement, in that tax year, will be allowed as a deduction to be deducted from the income derived by that employer from that trade.

(4) Where a learner contemplated in (1), (2) or (3) above is a

person with a disability at the time of entering into the learnership agreement, the above amounts increase by R20 000.

For more information refer to section 12H of the Act.

35

(q) Machinery, plant, implements, utensils or articles used in farming or

production of renewable energy or improvements thereto

Farming

An allowance in respect of these assets, brought into use for the first time by the taxpayer in the carrying on of farming operations, is equal to 50% of the cost to the taxpayer in the tax year in which the

asset is so brought into use; 30% of such cost in the second tax year; and 20% of such cost in the third tax year.

Production of bio-fuels

An allowance in respect of these assets, brought into use for the first time by the taxpayer for the purpose of the taxpayers trade to be used for the production of bio-fuels (bio-diesel and/or bio-ethanol), is equal to 50% of the cost to the taxpayer in the tax year in which the


Generation of electricity

An allowance in respect of these assets, brought into use for the first time by the taxpayer for the purpose of the taxpayers trade to be used in the generation of electricity from wind; sunlight; gravitational water forces to produce electricity of not more

than 30 megawatts; and biomass comprising organic wastes, landfill gas or plants,

is equal to 50% of the cost to the taxpayer in the tax year in which the


Note: All the assets referred to above must be owned by the taxpayer or acquired by the taxpayer as purchaser in terms of an agreement contemplated in paragraph (a) of an instalment credit agreement as defined in section 1 of the VAT Act.

36

For more information refer to section 12B of the Act.

(r) Film Owners

Special deductions are allowed in the determination of taxable income derived from their trade as film owners. These special deductions are contained in section 24F of the Act. Further information is available in the Guide to the Taxation of Film Owners which is available on the SARS website.

(s) Environmental expenditure

Environmental treatment and recycling assets [any air, water, and solid waste treatment and recycling plant or pollution control and monitoring equipment (and improvements to the plant or equipment)]: 40% of the cost to the taxpayer in the tax year the asset is

brought into use for the first time; and 20% in each succeeding tax year.

Environmental waste disposal assets, that is, any air, water, and

solid waste disposal site, dam, dump or reservoir, or other structure of a similar nature, or any improvement thereto:

5% of the cost to the taxpayer in the tax year the asset is brought into use for the first time; and

5% in each succeeding tax year. Post-trade environmental expenses

100% of the expenditure or loss incurred in respect of certain decommissioning, remediation or restoration expenditure For more information refer to section 37B of the Act.

(t) Residential units

(i) An allowance equal to 5% of the cost to the taxpayer of new and unused residential unit (or of new and unused improvement to a residential unit) owned by the taxpayer if

37

the unit or improvement is used by the taxpayer solely for the purposes of a trade carried on by the taxpayer;

the unit is situated within the RSA; and

the taxpayer owns at least five residential units within the RSA, which are used by the taxpayer for the purposes of a trade.

(ii) An additional allowance of 5% of the cost of a low-cost

residential unit of a taxpayer will be allowed if the allowance of 5% (referred to in (i) above) is allowable.

(iii) The percentages below will be deemed to be the costs incurred

by the taxpayer in respect of a residential unit where the taxpayer acquires a residential unit (or improvement to a residential unit) representing only a part of a building without erecting or constructing the unit or improvement

55% of the acquisition price, in the case of the unit being acquired; and

30% of the acquisition price, in the case of the improvement being acquired.

. For more information refer to section 13sex of the Act.

(u) Sale of low-cost residential units on loan account

For the disposal of a low-cost residential unit by the taxpayer to an employee a deduction is allowed equal to 10% of the amount owing to the taxpayer by the employee for the unit at the end of the taxpayers tax year.

Note: This deduction applies to taxpayers deriving income from mining operations. For more information refer to section 13sept of the Act.

(v) Environmental conservation and maintenance expenditure

Expenditure incurred by a taxpayer to conserve or maintain land,

if

(a) the conservation or maintenance is carried out in terms of a biodiversity management agreement that has a duration of at least five years entered into by the taxpayer in terms of the National Environmental Management: Biodiversity Act, No. 10 of 2004; and

(b) the land is utilised by the taxpayer for the production of

income and for purposes of a trade consists of, includes or is

38

in the immediate proximity of the land that is the subject of the agreement contemplated in (a).

Note: The above expenditure must not exceed the income derived by the taxpayer, from a trade carried on by the taxpayer on the land utilised as contemplated in (b). The excess amount will be carried forward and deemed to be a deduction in the next tax year.

Expenditure incurred by a taxpayer to conserve or maintain land

owned by the taxpayer is for purposes of section18A of the Act deemed to be a donation, if the conservation or maintenance is carried out in terms of a declaration that has a duration of at least 30 years in terms of the National Environmental Management Protected Areas Act, No. 57 of 2003.

If land is declared a national park or nature reserve and the

declaration is endorsed on the title deed of the land with a duration of at least 99 years, 10% of the lesser of the cost or market value of the land is for purposes of section 18A and paragraph 62 of the Eighth Schedule to the Act deemed to be a donation in the tax year in which the land is so declared and each of the succeeding nine tax years.


(w) Additional investment and training allowances for industrial policy projects

Additional investment allowance:

A company may deduct an amount equal to (a) 55% of the cost of any new and unused manufacturing asset

used in an industrial policy project with preferred status; or (b) 35% of the cost of any new and unused manufacturing asset

used in any other industrial policy project, in the tax year during which the asset is first brought into use by the company as owner.

The additional investment allowance may not exceed (a) R900 million for a greenfield project with preferred status, or

R550 million for any other greenfield project; (b) R550 million for a brownfield project with preferred status, or

R350 million for any other brownfield project.

39

Additional training allowance:

The company may also deduct an amount equal to the cost of training provided to employees in the tax year during which the cost of training is incurred for the furtherance of the industrial policy project.

The training allowance may not exceed R36 000 per employee. This allowance may not exceed (a) R30 million for an industrial policy project with preferred status;

and (b) R20 million for any other industrial policy project.

For more information refer to section 12I of the Act.

(x) Expenditure incurred to obtain a licence

Expenditure (not in respect of infrastructure) incurred to acquire a licence from certain government authorities to carry on a telecommunication, petroleum or gambling trade, may be claimed as a deduction from income over the number of years for which the taxpayer has the right to the licence, or 30, whichever is the lesser.

For more information see section 11(gD) of the Act.

(y) Deduction for expenditure incurred in exchange for issue of venture capital company shares

This deduction aims to encourage investors to invest in approved venture capital companies (VCCs), which in turn, invest in qualifying investee companies (that is, small and medium-sized businesses and junior mining companies).

The deduction is allowable from the income of individuals and listed companies, including section 41 of the Act group company members, for expenditure incurred to acquire shares issued by VCCs.

Deductions allowable to investors for expenditure incurred are as follows:

(a) Individuals (natural persons)

Annual deduction limit to R750 000

Cumulative lifetime deduction limit to (adjusted for recoupments) R2,25 million

(b) Listed companies (and their group subsidiaries)

40

A listed company is entitled to a100% deduction of amounts invested in a VCC to the extent that its investments, including the investments of its group companies, do not exceed 40% of the equity shares of the VCC

Note: A claim for a deduction must be supported by a certificate issued by the approved VCC. For more information see section 12J of the Act and the REFERENCE GUIDE VENTURE CAPITAL COMPANIES (VCCs) available on the SARS website under All Publications.

(z) Deduction of medical lump sum payments

Provided certain conditions are met, a taxpayer will be allowed to deduct from his or her income derived from carrying on a trade a lump sum payment to a medical scheme or fund in respect of any former employee who has retired or to a dependant of that former employee with effect from 1 September 2009.

For more information refer to section 12M of the Act.

Tax relief measures for:

Small business corporations (SBCs)

For tax purposes an SBC can be a CC, co-operative or a private company.

The tax legislation regarding an SBC allows two major concessions to an SBC, which complies with all of the following requirements

all the shareholders or members of the SBC must at all times

during the tax year be natural persons (individuals):

shareholders or members of the SBC may not hold any shares or interest in the equity of any other company. However, a share or interest in the following entities are excluded from this requirement o listed companies; o a portfolio in a collective investment scheme contemplated in

paragraph (c) of the definition of company in section 1 of the Act);

o a company contemplated in section 10(1)(e)(i)(aa), (bb) or (cc) of the Act (that is, a body corporate, share block company, company incorporated under section 21 of the Companies Act, 1973 or an association of persons);

41

o less than 5% of the interest in a social or consumer co-operative or a co-operative burial society;

o friendly societies; o less than 5% of the interest in a primary savings co-operative

bank or a primary savings and loans co-operative bank as defined in the Co-operatives Banks Act, 2007, that may provide, participate in or undertake only the following in the case of a primary savings co-operative bank,

banking services contemplated in section 14(1)(a) to (d) of the above-mentioned Act; and

in the case of a primary savings and loans co-operative bank, banking services contemplated in section 14(2)(a) or (b) of the above-mentioned Act;

o venture capital companies (as defined in section 12J of the Act); or

o if the company, close corporation or co-operative has not during any year of assessment carried on any trade and has not during any year of assessment owned assets with a total market value of which exceeds R5 000;

the gross income of the SBC for the year of assessment may not

exceed R14 million;

not more than 20% of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains of the SBC may consist collectively of investment income and income from rendering a personal service; and [Investment income includes interest, dividends, royalties, rental in respect of immovable property, annuities or income of a similar nature, interest contemplated in section 24J of the Act, other than interest earned by a co-operative bank, amounts contemplated in section 24K of the Act and proceeds derived from investment/trading in financial instruments/marketable securities/immovable property.

Personal services are services in the field of, for example, accounting, real estate and engineering which are performed personally by a person holding an interest in the SBC. An SBC which is engaged in the provision of personal services will still qualify for the relief if it throughout the year of assessment employs three or more full-time employees (excluding shareholders/members and connected persons to such shareholders/members) who are on a full-time basis engaged in the business of the SBC rendering that service.]

42

the SBC may not be a personal service provider (as defined in the Fourth Schedule to the Act) see under the heading: Other types of business entities as described in the Act.

The first concession is to be taxed on the basis of a progressive

rate system, namely ,

0% on the first R54 200 of taxable income:

10% on taxable income in excess of R54 200 but not exceeding R300 000; and

R24 580 plus a rate of 28% on taxable income in excess of R300 000.

The second concession (see also under Special allowances) (a) the immediate write-off of all plant or machinery used in a

process of manufacture or similar process (manufacturing assets) in the tax year it is brought into use for the first time; and

(b) an accelerated write-off allowance for depreciable assets (other than manufacturing assets) acquired on or after 1 April 2005 at

50% of the cost of the asset in the tax year during which it was first brought into use;

30% in the second tax year; and

20% in the third tax year. An SBC can elect to either claim the 50:30:20 deductions or the wear-and-tear allowance under section 11(e) of the Act.

For more information refer to Interpretation Note No. 9 (Issue 5): SMALL BUSINESS CORPORATIONS on the SARS website.

Micro businesses (turnover tax)

A person qualifies as a micro business if that person is a

(a) natural person (or the deceased or insolvent estate of a natural person that was a registered micro business at the time of death or insolvency); or

(b) company,

where the qualifying turnover of that person for the tax year does not exceed an amount of R1 million.

Tax year ending

during the period of 12

months

Taxable turnover (R) Rate of tax (R)

43

For more information refer to the TAX GUIDE FOR MICRO BUSINESSES 2009/10 available on the SARS website.

Manufacturing

Special allowances are granted to persons engaged in a process of manufacture or a process of a similar nature.

An SBC, as indicated above, may write off 100% of the costs of its manufacturing plant or machinery.

An allowance for new or unused machinery or plant acquired and brought into use and used directly by the taxpayer in a process of manufacture or similar process, is available. An allowance equal to 40% of the cash cost of the asset will be deducted in the first tax year and 20% of the cost for the subsequent 3 tax years.

Farming

Farming operations include livestock farming, crop farming, milk production, plantation farming, sugar cane farming and game farming.

Persons carrying on farming operations are required to account for the value of livestock and produce on hand at the beginning and end of a tax year in their tax returns. The values to be placed on livestock at the beginning and end of the tax year are the standard values as prescribed by regulation (see Income tax Regulations under section 107 of the Act, PART D, Standard Values of Livestock). Produce, on the other hand, must be accounted for at cost of production or market value, whichever is the lower.

Game is also regarded as livestock, but due to practical difficulties that can be encountered in establishing the actual numbers of game on hand at any given time, game is excluded from opening and closing stock.

ending on

31/03/2010 1 100 000

0%

100 001 300 000 1% of the amount above 100 000

300 001 500 000 2 000 + 3% of the amount above 300 000

500 001 750 000 8 000 + 5% of the amount above 500 000

750 001 and above 20 500 + 7% of the amount above 750 000

44

Game farmers must prove that the game is purchased, bred and sold on a regular basis with a genuine intention to carry on farming operations profitably in order to qualify as farmers. Income relating to accommodation and catering facilities for visitors does not qualify as income from farming operations and separate financial statements must be drawn up for such income.

Deductions for farmers include the following:

o Expenditure incurred in respect of prevention of soil erosion,

eradication of noxious plants/alien invasive vegetation, dams, fences, etc to conserve and maintain land owned by the farmer is allowed as a deduction if certain conditions are met as set out in paragraph 12(1A) of the First Schedule to the Act.

o Capital expenditure

The deduction of capital expenditure, such as the development of and improvements to farming property, is permitted in the determination of taxable income. This deduction may not exceed the farmers taxable income from farming operations in respect of that year. If the amount of such expenditure exceeds the income in that year, the balance will be carried forward and deducted in the succeeding year, subject to the same limitation.

For more information see paragraph 12 of the First Schedule to the Act or contact a SARS office..

o Machinery, plant, implements, utensils or articles (see also

under Special allowances) used by a farmer in farming operations or production of renewable energy is written off at the following rates:

First year : 50%

Second year : 30%

Third year : 20%

Special measures in determining taxable income of farmers

Since a farmers income can fluctuate considerably from year to year, the Act contains provisions whereby the farmer may be taxed on the basis of his/her annual average taxable income from farming in the current and previous four tax years. Relief is also given to farmers whose income for any tax year includes any of the following income derived from

the disposal of plantation and forest produce;

45

the abnormal disposal of sugar cane as a consequence of damage to cane fields by fire;

the disposal of livestock sold on account of drought; or

excess profits as a result of farming land acquired by the State or certain juristic persons.

Mining

Mining enterprises are allowed to deduct capital expenditure incurred in full in the tax year the expense was incurred. Capital expenditure, for example, includes expenditure on shaft sinking and mining equipment. It also includes expenditure on development and general administration prior to the commencement of production or during a period of non-production.

The capital expenditure incurred on a particular mine is restricted to the taxable income derived from that mine only. Any excess (unredeemed) capital expenditure is carried forward and is deemed to be capital expenditure incurred in the next tax year in respect of the mine to which the capital expenditure relates. Furthermore, the capital expenditure of a mine cannot be set-off against non-mining income such as interest, rental, other trading activities, etc.

As stated above the capital expenditure of one mine may not be set-off against the taxable income of another mine. However, where a new mine commences mining operations after 14 March 1990 its excess (unredeemed) capital expenditure may also be deducted from the total taxable income derived from mining in respect of other mines operated by the taxpayer, as does not exceed 25% of such total taxable income derived from its other mines.

The taxable income of a company derived from mining for gold is taxed in accordance with a special

tax guide for small businesses 2009/10 businesses tax guide 2010.pdf · y conclusion 91 . 7 1. ......

Documents